Territorial Tax System Would Improve Global Competitiveness

June 4, 2012

America's tax system needs an overhaul. It is too complex and many provisions are unreliably temporary. Even rules that work as intended have been branded as loopholes. Furthermore, the system is clearly uncompetitive, as shown by both our outdated worldwide system, which double-taxes American companies, and our corporate tax rate, now the highest in the developed world, says Greg Hayes, the senior vice president and chief financial officer of United Technologies Corp.

The disadvantages of our worldwide system of taxation can be seen in the experience of Otis Elevator Co., one of United Technologies' flagship businesses.

In 2011, while 15,000 elevators were sold in the United States, 380,000 were sold in China.

It is important in the elevator industry for a selling company to be close to its clientele, meaning that Otis has little choice but to station operations in China to tap that market.

Unfortunately, the current corporate tax system taxes Otis twice, undermining its ability to compete with other international players in the market.

In addition to paying the corporate tax in China, Otis must pay American corporate income taxes on any cash flows coming back to the United States.

This contrasts with the territorial tax system adopted by almost every other developed country, which requires companies only to pay taxes at the point of sale.

This outdated tax system -- combined with the fact that the United States has the highest corporate tax rate in the developed world -- significantly damages American companies' international competitiveness. Reform has been advocated by the Simpson-Bowles Commission, the President's Export Council, and other prominent congressional and business leaders.

Additionally, the penalty for remitting profits back to the United States discourages American multinational companies from doing so, thereby further discouraging domestic investment. A lesson from Germany is illustrative: the country has had a territorial system for years and remains one of the world's top exporters.

Source: Greg Hayes, "Territorial Tax System for U.S. Would Improve Global Competitiveness," Investor's Business Daily, May 16, 2012.